United States v. Centennial Savings Bank FSB

PETITIONER: United States
RESPONDENT: Centennial Savings Bank FSB
LOCATION: Oklahoma City Board of Education

DOCKET NO.: 89-1926
DECIDED BY: Rehnquist Court (1990-1991)
LOWER COURT: United States Court of Appeals for the Fifth Circuit

CITATION: 499 US 573 (1991)
ARGUED: Jan 15, 1991
DECIDED: Apr 17, 1991

ADVOCATES:
John G. Roberts, Jr. - for petitioner
Michael F. Duhl - Argued the case for the respondent

Facts of the case

Centennial Savings Bank exchanged interests in one set of mortgage loans for another set of mortgage loans of the same market value. The mortgages were worth substantially less at the time they were exchanged than they had been at the time they were acquired, however, and Centennial reported the difference as lost income on its income tax return. In a separate set of transactions, Centennial collected early withdrawal penalties from customers who withdrew their certificates of deposit before they were scheduled. Centennial reported the early withdrawal penalties as "income from the discharge ... of indebtedness," meaning that it did not need to be reported as income under 26 U.S.C. 108(a)(1)(C).

With regard to the exchanged mortgages, the IRS did not allow the deduction, ruling that the properties exchanged had not been "materially different" and that the exchange therefore did not actually produce a reportable loss. With regard to the withdrawal penalties, the IRS ruled that they had to be reported as income. Centennial took the issue to federal District Court, where a judge ruled for the IRS on the mortgage exchange issue but for Centennial on the withdrawal penalty one. The Fifth Circuit Court of Appeals reversed the mortgage exchange holding and upheld the withdrawal penalty holding, siding with Centennial on both issues.

Question

Can a bank list the exchange of properties that have equal fair market value as a loss on its federal Income Tax return if the property it loses is worth significantly less at the time of the exchange than it was when the property was initially acquired? May a bank treat money received from early withdrawal penalties as "income from the discharge ... of indebtedness" under 26 U.S.C. 108(a)(1)(C)?

Media for United States v. Centennial Savings Bank FSB

Audio Transcription for Oral Argument - January 15, 1991 in United States v. Centennial Savings Bank FSB

Audio Transcription for Opinion Announcement - April 17, 1991 in United States v. Centennial Savings Bank FSB

Thurgood Marshall:

The second case, United States versus Centennial Savings Bank No. 89-1926, is here on certiorari to the United States Court of Appeals for the Fifth Circuit.

In an opinion filed with the Clerk today, we hold that a lending institution realizes deductible losses when it exchanges mortgage loan with another lender.

We also hold that family withdrawal from these accounts collected by a savings account do not qualify as income from the discharge of in debt following under Section 108 of the tax code.

We therefore affirm in part and reverse in part the judgment of the Fifth Circuit.

Justice Blackmun has filed an opinion concurring in part and dissenting in part in which Justice White joins.